Using Credit Wisely: What Young Borrowers Need to Know
NEW YORK ( MainStreet) Most people think young people and credit can make for a deadly, debt-ridden mix.
However, young borrowers those between 18 and 25 years old are among the least likely to seriously default on their credit cards, according to a new survey by the W. P. Carey School of Business at Arizona State University and the Federal Reserve Bank of Richmond.
The new research found while people in their early 20s are more likely to experience slight or minor delinquencies 30 or 60 days past due they actually are much less likely to experience serious delinquency more than 90 days past due.
The study showed rather than college kids being the most likely to fall behind in payments, it was actually those between the ages of 40 to 44 who were 12 percentage points more likely to have a serious delinquency.
"Young credit card users actually default less than middle-age borrowers," said Andra Ghent, an assistant professor at the W. P. Carey School of Business. "Also, those who choose to get credit cards early in life are more likely to learn from any minor defaults and move on, avoiding major credit card problems in the future. Plus, they're more likely to be able to get a mortgage and become a homeowner at a young age."
The research also showed the propensity to experience a serious default clearly peaks at middle age. People aged 35 to 44 were 10 percentage points more likely to experience a serious default than an 18- to 20-year-old and 12 percentage points more likely than an individual 65 or older.
The study said while it is not clear exactly why defaults increase in middle age and reach their lowest point in older age, one reason may be that people are typically spending the most money during their middle-age years.
"Those also are prime earning years for most people, and people have a tendency to spend to their income," said John Ulzheimer, consumer credit expert at CreditSesame.com.
The study may rebuke the necessity of Credit Card Act of 2009, according to its researchers. That act made it illegal to issue a credit card to individuals under 21 unless the person has a cosigner or submits financial information indicating an independent means of repaying the debt. It also includes a provision banning companies from recruiting credit card users within 1,000 feet of any college campus or at college events.
"Letting students apply for credit cards may actually make sense," Ghent said. "These students are the people who want credit, need to build up a good credit history and have a steeply sloped income profile. If they don't have a student loan, then a credit card may be the only way they can establish a decent credit history."